Inventory In-Class Questions: Part2c: The new CEO of Famous Butter Made Cookies
ID: 371367 • Letter: I
Question
Inventory In-Class Questions: Part2c: The new CEO of Famous Butter Made Cookies (FBMC) directs you to create a new fixedorder quantity model. Given the following information, what is the reorder point for this new model? The predicted demand for a one month (30 day) planning horizon is 120,000 cookies. You know that the holding cost is $0.25 per cookie per day. The ordering cost is $12,500 per order. The lead time to bake cookies is 1 day, the average daily demand is 4,000 cookies and the variance of daily demand for cookies equals 100,000. The desired service level is 99.997%. Assume that 20,000 cookies are currently in stock.
Explanation / Answer
Monthly demand for cookie = D = 120,000
Holding cost of cookie per month of 30 days, $
= Holding cost per day x 30 days
= 0.25 x 30
= 7.5
Ordering cost = F = $12,500 per order
Accordingly , optimal EOQ quantity of cookie
= Square root ( 2 x F X D/C)
= square root ( 2 x 12500 x 120,000/ 7.5)
= Square root ( 400000000)
= 20,000
OPTIMAL EOQ QUANTITIES OF COOKIES TO ORDER 20,000
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